Cost calculation – process costs

Posted on: November 8, 2018, by :

In the introduction of cost calculation, we’ve seen that the total cost of a product is a combination of raw material costs, process costs and overheads and profits.

This post is about the cost calculation of process costs which is defined by cycle time, machine rate, number of products per cycle, set up time and human labor content.

Cycle time

First, the cycle time. The cycle time is the time it takes to perform one operation (cycle). For example, in injection molding, a cycle is made up of closing the cavity, injection the material, cooling, opening the cavity and ejection of the part(s). This can take anywhere between a couple of seconds up to multiple minutes.

As the cycle time largely determines the number of products per hour, this has a large impact on the total cost price. Imagine a cycle time of 60 seconds per product and a machine rate of 60 EUR per hour: the total machine cost per product is hereby 1 EUR per product. 

The influence on cycle time is the largest in the design stage of a product. Especially when you have good suppliers and are open to suggestions, you can influence the cycle time to a large extent. Talk to your suppliers and use their suggestions when appropriate. This gives you a competitive advantage and a committed supplier.

Finally, remember that all cycle times in quotations are estimates. Always agree to use estimates as worst case scenario’s and verify the actual cycle time during production.

Machine rate

The machine rate is a complicated calculation which incorporates the cost of the square meters of the machine, the depreciation of the machine, the number of assumed running hours per period, running costs such as power consumption and maintenance costs. 

Many of these attributing factors can be kept “vague”, as it is very hard to attribute the actual costs to machines. For example, which area of a plant is considered to be needed for a specific machine? Is this 10m2 or 11m2? When auditing a plant, this seems arbitrary – yet there is a 10% difference between the 2. An example: let’s say that it costs 100 EUR per year per square meter of floor space. This contributes 1000 EUR per year in case of 10 square meters, or 1100 EUR per year in case of 11 square meters. Against 2.000 running hours per year, this is 5ct per hour difference. Not much – but that’s also exactly the pitfall. 

Similarly, but with a larger impact, we can take depreciation of the machine. Assume a machine costs 500.000 EUR and has a residual value of 50.000 EUR after 10 years. This means that the machine is depreciated with 450.000 EUR in 10 years, or 45.000 EUR per year. Now there are a couple of issues which any vendor can use to its advantage: in most cases a machine is depreciated not on its technical lifespan which is described above, but on an economical basis or taxation. In reality, probably the supplier tells you they depreciate the machine in 7 years (almost 65.000 per year) and even worse: probably to 0 EUR as “the residual value is hard to estimate”. In the latter case, you are talking 91.500 EUR per year on depreciation – double compared to the technical depreciation.

The impact of this difference is against 2.000 running hours per year almost 22.5 EUR per hour. Now, worse yet is the fact that most machines run much longer than the technical depreciation. I’ve been in numerous plants where the average machine age was about 12 years. However in the cost calculations, usually the depreciation costs is fully present. 

As you can see, I’ve used 2.000 running hours per year. This is a rather optimistic number assuming 1 shift-operation and a rather pessimistic value considering 24/7 production. Just take this in mind when doing the calculations: which number of running hours is considered in the quotation? 

Running costs, such as power consumption, is really hard to estimate. A machine might have a listed power of 100kw. This means that at 100% of its power consumption, the machine is using 100kwh. The industrial costs for this is about 5-7 EUR per hour. However: the machine is rarely using 100% of its power. 70% is a good estimate. This gives a 1.5-2 EUR per hour difference.

Maintenance costs are costs for spare parts and maintenance personnel. 2% of the original value is a good estimate for the first 2 years of its lifespan. On average, I would take 5%. It is OK to let this number increase for older machines, as long as the depreciation is striped out of the equation and the capacity can still be guaranteed.

Bear in mind with machine rates, that when they are put in sequence, the slowest of all machines determines the costs of the complete line. If a machine is capable of producing 100 parts per hour, but the next step in the production line can only process 70 parts per hour, then the cost calculation must give 70 parts per hour for all machines. This is where “load balancing” comes in to play.

Number of cavities

The number of cavities or products per cycle may influence the process costs to a large extent. When you get 2 products instead of 1 during the same cycle, the process costs are usually 50% of the original. Imagine having 128 cavities: what an economies of scale did you reach here!

Did you? That depends on which volume you need to have produced and the size of the products. Larger molds or tools requires a larger investment which needs to be offset by product price. Low volumes make this impossible. Additionally, you need to consider the size of the machine you need to run it on: larger molds and tools require larger and more expensive machines to run it on and usually a longer set up time. On top of this, the cycle of making 128 parts is longer than making 1 part. Not 128 times longer of course, but it may easily make it twice as long. Imagine the spoons of McDonald’s. These may be made with a 128 cavity tool, running on a 1000t machine. This tool may cost about 250.000 EUR. A double cavity tool for the same products would cost about 15.000 EUR and could run on a 25t machine. Obviously, in this comparison the costs are easily offset by the benefits due to the to be expected very large volume.

Do bear in mind the following: when handling multiple cavities, also the costs of changing the product are multiplied and the precision of the mold or tool needs to be much larger. This has to do with statistics and process control, but believe me when I say that making 1 product at a small dimensional tolerance is much easier than 128. 

Set up time

Set up time is a quick win for suppliers. They might tell you that it takes 4 or 8 hours to setup the machine. Idle time, in which no production is made and for which you as a customer are carrying the costs. On top of this, it is very hard to judge as the chance that the tools need to be changed when you visit your supplier is very slim. This setup time is used to entice you to make larger production runs and prevent change overs. By this, the efficiency can be increased and some buffer in production is created in case you need to change the tools anyway. Instead of 6 hours, it probably only takes 2 hours.